How effective are policies that use taxpayer funds to boost SME and Entrepreneurial activity?

Governments in developed countries appear to believe that either the nature, or the scale, of their country’s entrepreneurial activity is sub-optimal. So, to stimulate this activity, they employ taxpayer funds. This paper, published in the journal Entrepreneurship Theory and Practice, examines the effectiveness of such policies in Sweden – and then extrapolates the Sweden exemplar to several other countries and regions, including Flanders.

One of the paper’s key contributions is to provide a methodology that the authors used to assess the costs to the taxpayer of enhancing the performance of existing (small and medium-sized) firms and of promoting the creation of new enterprises in Sweden.

The authors – including Prof Miguel Meuleman of Vlerick Business School – then compare the resulting expenditure patterns with the focus of policy as expressed by experts. They find important areas where the two diverge – implying a possible mismatch between actual expenditures and implied or explicit political priorities.

Assessing policy effectiveness

This study fills an important gap in this area of research by providing an overall appraisal of the effectiveness of such policies in boosting SME and entrepreneurial activity. As the authors state: “We would like to be able to undertake some form of cost-benefit analysis (CBA) of this policy area in order to ascertain its overall effectiveness, as well as the effectiveness of its constituent elements.”

The paper makes 3 main contributions:

Demonstrating that – although it requires great care and precision, as well as some estimation – it is possible to derive an acceptably reliable estimate of the costs of SME policy and entrepreneurship policy.

Offering insights into whether the SME policy and entrepreneurship policy budget is spent in areas of maximum effectiveness.

Making a case for such work to be conducted in other countries and regions. The experience of Sweden is that such work generates considerable political interest. The more preliminary findings for Poland, Austria, and Flanders show the potential for applying the Swedish exemplar to other countries and regions.

Key findings and the way forward

The authors’ first conclusion for Sweden is that the main form of expenditure is the provision of financial tax reliefs, primarily to existing SMEs. But, by definition, this means that – despite much talk about creating an environment to promote the creation of new enterprises – the bulk of public expenditure goes to well-established enterprises.

The authors do not judge whether or not this is desirable, but as they ‘track the cash’ they find a somewhat different picture of priorities in this policy area from those that are publicly understood by experts.

In the authors’ view, governments owe it to their taxpayers (and to small business owners and potential owners) to make the scale of total expenditure and the priorities for that expenditure transparent. Their study demonstrates that this can be achieved and that a methodology to achieve it is available. They urge governments to take the Sweden exemplar on board and document annually the total expenditure and its distribution across functional areas.